* We have a number of
short-term indicators that are screamingly oversold, which is both expected
after a drop like yesterday and meaningless because the market is not trading
based off technical measures at this point.

* In order to try to get
any kind of a handle on what may happen, it's best to look at prior "shock
days", and that's what we do in today's Report. The precedents were clear
- a short-term rally, then re-test of the panic lows, then (probably) a more
intermediate-term recovery.

Why: It's pretty much pointless to discuss any
oversold indicators at a time like this. Yes, we're
seeing some extreme readings (close to multi-year records in
some cases like
Down Pressure and the
Indicator Score), but the market is not trading off of
stuff like that right now. We're in all-out
recover-from-crash-and-try-to-pick-up-the-pieces mode right
now. This has happened before, and the outcome is
typically pretty predictable - a short-term rally as traders
and investors dust themselves off and realize that the world
is still spinning, then more trouble as the reasons for the
crash come to light, and systemic cockroaches get exposed.
That is what causes the almost-inevitable re-test of the
panic lows. Yesterday was different than most in that
we recovered so much of the crash intraday, so it makes me a
little bit leery of some of the prior precedents. But
until I have good reason not to, I'll be looking for a
short-term rally (1-5 days max) to fail, and carry us back
down towards the lower end of yesterday's range. We
should not trade back above yesterday's highs in any
sustained manner any time soon, or we'll have to throw out
the prior "shock day" precedents.

Why: On
April 15th, the Dumb Money pushed up to 75%, and the
spread between that and the Smart Money reached to -45%.
In addition, we got a tremendous surge in the number of
bearish (for the market) Indicators At Extremes.
That's the kind of development that doesn't necessarily
indicate an imminent market peak, but it does almost always
mean that any further short-term gains will be erased.
Now that that has happened, and volatility has exploded
higher, we have a very unusual situation with the "shock
day" on May 6th. We looked at somewhat similar days in
today's Report, and the conclusions are pretty clear - a
short-term rally is likely, followed by a re-test of the
panic low. There are some reasons to expect this time
to be different, but even so it's the template we're going
with. If we do see a re-test of the May 6 lows in the
coming weeks, by that time there is a very real chance that
sentiment will have cycled back to enough pessimism that we
could get a very decent multi-month rally.

Yesterday's
trading can best be looked at in terms of shock value. And the
best way to look at shock value is to determine just how unusual the
move was in comparison to what we've become accustomed.

The range
(highest intraday high minus the lowest intraday low) in the S&P 500
yesterday was over 100 points. The Average True Range over the
past 3 months is just under 14 points. So yesterday, we saw a move
that was more than 7 times beyond what has been "normal".

There has only
been two days in the past 30 years that can match that kind of shock
value: October 19, 1987 and October 13, 1989.

Both are
instructive, but it's hard to rely on just two precedents. So
let's go back to 1962 and look for any time we saw a move that was at
least 4x the range of the past three months. We're talking about
intraday moves here, and not closing ones, so we can only go back as far
as we have that data. I have it to 1962, though it is less
reliable prior to 1982.

Tables and
numbers aren't a lot of help at times like this, so instead let's look
at each of the charts that qualify. The "shock" day is highlighted
in red and has an arrow pointing to it. The yellow box on each
chart equates to the high and low from the shock day.

Conclusions:

* There might be 1-3 days more selling pressure after the shock,
especially intraday the following day...but that was more typical when
stocks ended near their low on the shock day, unlike yesterday.

* After the initial low, there was typically a 2-5 day vicious
rally.

* Every time, that initial rally failed and we ended up re-testing
the panic low.

* The intraday range during the shock day (the yellow highlights)
contained most of the trading for the next 1-3 months - any probe above
or below was usually beaten back quickly.

* All of these occurrences precipitated fairly major
intermediate-term market bottoms.

I have no reason to suspect we're going to see anything different this
time. When we get historic declines on an intraday basis, it is
almost automatic that we see a quick relief rally.

It sometimes takes a few days for the "bodies to get carried out" -
funds that were caught wrong-footed during the day and that will be
forced to liquidate. It happens every time, even when it doesn't
make the headlines. That's what often causes the second wave of
selling pressure.

I'll be looking for any 1-5 day rally (back towards 1150?) to ultimately
fail, and carry us back down towards the lower end of yesterday's range.
I see no hurry in doing any longer-term buying, as the precedents were
clear that a re-test of some sort was in the cards.

The afternoon recovery was very dramatic and doesn't fit well with many
of the precedents, so I suppose this could be an exception, especially
if it comes out that the trading was triggered by a massive trading
error. But the only real way that would convince me
that the above precedents won't hold is if we see more than a week-long
rally, that takes us above and holds yesterday's highs.

The relentless
uptrend since the February bottom met with a couple of spikes in our
bearish (for the market) indicators, and except for a small hiccup here
and there, stocks didn't pay much mind.

A couple of
weeks ago, we got a huge spike in the number of bearish indicators, and
after a tiny hiccup, stocks went on to make another high. It was
choppy and took longer than usual, but it finally resulted in those
gains begin given back per usual. Now we're starting to see a move
to the opposite extreme, but it's going to take awhile for the number of
bearish indicators to drop off towards 0%.

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